For the past two years, China’s winter supply-side production restrictions have delivered surprising moves in commodities prices. Price volatility may be even higher this year, based on this week’s market reaction to rumors of canceled production limits (which were quickly denied). As winter production restrictions approach, local governments facing heavy financing pressures have new incentives this year to strictly enforce limits to boost profit margins for local producers, in part because of reforms to China’s tax system. As a result, downside risks to producer price inflation appear limited in the next six months.
